Sunday, December 4, 2011

The Defense Department & Wall Street

Behind the growing push to slash soldiers' pensions
and other military costs is a little-known advisory group—stacked
with Wall Street executives.

With time fast running out for the so-called deficit supercommittee,
the mammoth amount of government money spent on the military has
become a prime target in Washington. But the main focus isn't on
big-ticket weapons projects or expensive wars—it's on retirement
benefits for the roughly 17 percent of soldiers, Marines, sailors, and
airmen who have served 20 years or more in uniform. Currently the
total cost of their benefits is about $50 billion a year.

Cuts to military pensions are "the kind of thing you have to
consider," Defense Secretary Leon Panetta said in September. When
President Obama unveiled his $3 trillion debt reduction plan the same
month, it called GIs' benefits "out of line" with private
employee retirement plans, saying the system was "designed for a
different era of work." When Congress held a hearing on military
retirements in October, Rep. Austin Scott (R-Ga.) promoted a cheaper
401(k)-style plan that would slash existing benefits for many troops.
"I see nothing wrong with them being able to choose a different
retirement plan," he said.

These ideas may sound like a bold new approach in an urgent
moment—but in fact, the push for pension cuts and other corporate
"reforms" at the Pentagon originates from an obscure
advisory panel that has existed for a decade: the Defense
Business Board. Its 21 members know little about military affairs,
but they are rich in Wall Street experience, including with some of
the biggest companies implicated in the 2008 financial meltdown. They
are investment bank CEOs and CFOs, outsourcing experts, and layoff
specialists who promote a corporate agenda of "behavior
change" and "business solutions" in the military
bureaucracy. The board proposes not only to slash and privatize
military pensions, but also to have the Pentagon invest in oil
futures, boost pay for its executives and political appointees, and
make it easier for them to fire rank-and-file employees while scaling
back those workers' collective-bargaining rights.

Indeed, "this sounds like what's being done now around the
country with the public unions," affirms Charles
Tiefer, a University of Baltimore law professor and defense
contracting watchdog who's testified to Congress about the board's
recommendations. The board was launched in 2001 by then Defense
Secretary Donald Rumsfeld, who famously wanted to downsize the
military and corporatize its management system. The essential reason
it exists, Tiefer says, is so that "a pro-business
attitude—especially on personnel issues—remains intact"
inside the Pentagon.

While the board's ideas have enjoyed support on Capitol Hill over
the years, it has made only a modest impact on policy. Now, the
board's proposals—which they say represent "a
culture of savings"—are gaining currency as politicians
look to cut federal spending any way they can.

When the federal debt ceiling crisis was escalating in July, a report
(PDF) from the board argued that paying soldiers and their families
for 60 years after 20 years of service was "unsustainable,"
adding, "The 'Military Retirement' sacred cow is increasingly
unaffordable." The board called for scrapping the system in favor
of a mandatory 401(k)-style account whose savings could "be
invested in higher yielding equities and bonds."

Over the years, the board has recommended a series of
"cost-saving" measures that would channel large amounts of
money to private-sector businesses.

The board's proposal would set aside 16.5 percent of a troop's base
salary in a savings account to be invested in the markets. Assuming a
modest annual return—hardly a safe assumption these days—the plan
would still provide retired soldiers with far less money than what
they are entitled to now. Critics say the proposal would also make it
harder for the military to retain its most senior, most knowledgeable
members. As Joe Davis, public affairs director for Veterans of Foreign
Wars, put
it in August: "Where will our future military leaders come
from if people leave the service early because they're losing
retirement money?"

It's a plan that even Rep. Joe Wilson (R-S.C.), chairman of the
House subcommittee on military personnel (who's known for shouting
"You
lie!" at President Obama during his 2009 health care address
to Congress), has called "radical…a very controversial proposal
with immediate negative consequences for morale and combat
readiness."

The head of the Defense Business Board's pensions task force,
Richard Spencer, served as a Marine aviator in the 1970s. But more
recently, he was the CFO of a web-based commodities and derivatives
exchange that is under investigation in Europe for its trading in
credit default swaps just before financial markets imploded in 2008.
Prior to that job, Spencer worked "on Wall Street for 15 years
where his responsibilities centered on investment banking services
focusing on strategic advisory services and capital markets
underwriting," according to his
current biography on the Defense Business Board's website.

A cached
version of Spencer's bio identifies the firms where he previously
served: Goldman Sachs, Bear Stearns, and Merrill Lynch, three of the
biggest Wall Street banks involved in the housing and credit collapse.
Joining him in the board's vote to gut military pensions were the
managing director of Accenture's defense industry portfolio; the
chairman of HR consultant Convergys, "a leading outsourcing
company"; the CEO of the Bank of Virginia; several high-profile
investment bankers; and two Sears executives.

Over the years, the board has recommended a series of
"cost-saving" measures that would channel large amounts of
money to private-sector businesses. Its members have consistently
advocated for the Pentagon to engage in fuel hedging—investing in
oil futures to lock in a supposedly low cost for their long-term fuel
needs. The board's fuel-hedging push was led by member Denis Bovin,
who was
a top investment banker for Bear Stearns until the firm went bust
in late 2008. After consulting with energy giants BP and Shell, among
others, Bovin's team concluded that the Department of Defense should
invest based on rising oil prices, even while he conceded that
"as a whole, DoD is not highly exposed to fuel price
volatility." Such deals, he noted, would incur investment
transaction costs of "$10 to $250 million per year." Even
though no federal agency currently engages in fuel hedging, the board tasked
Bovin with another study on oil futures last January.

The Defense Business Board was born in another American era, on
September 10, 2001. That morning, Rumsfeld rose
before a crowd of Pentagon workers to declare war on "an
adversary that poses a threat, a serious threat" to the nation:
"It disrupts the defense of the United States and places the
lives of men and women in uniform at risk." He was speaking not
of Russia or China or even international terrorism, but of the
military's own bureaucracy. He announced: "We're establishing a
Defense Business Board to tap outside expertise as we move to
improve the department's business practices."

"Some of those ideas go way back," says Thomas
Christie, a career defense analyst for multiple administrations
who was called out of retirement by Rumsfeld in 2001 to help improve
the Pentagon's weapons-buying process. Rumsfeld, Christie says,
"just had a suspicion about the whole bureaucracy; he didn't
trust it." But Rumsfeld did trust private enterprise, and the
September 11 attacks only temporarily sidetracked his transformation
efforts. By March 2002, the Defense Business Board held its first
meeting, tasked with (among other things) achieving "a cost
effective military" with private-sector employment practices
and providing "civilian human resources faster, at a reduced
cost and by taking advantage of the power of automated tools."

He couldn't have asked for a better group to help corporatize the
Pentagon: Its original 19 members included the vice chairman of Bear
Stearns; an ex-CEO of AOL; executives from PricewaterhouseCoopers
and Deutsche Bank; a Goldman Sachs board member who would later land
in hot water for a $1.7 million purchase of the company's stock; and
Richard
Perle, nicknamed the "Prince of Darkness," who gained
notoriety as a Bush administration cheerleader for the Iraq War.

The leader of the board's supply chain task force was Gus
Pagonis, a senior VP for Sears who, as an Army general had
managed supply and logistics for the Gulf War, and whose son
would hold a similar position in the second Iraq War. As the head of
its "change management" task force, the board chose Dana
Mead, a layoff king who titled his autobiography High
Standards, Hard Choices: A CEO's Journey of Courage, Risk, and
Change. As CEO of the Navy's largest shipbuilding yard in
Virginia, he'd assured workers in 1994 that there'd be no layoffs;
two years later, Mead had canned nearly 10,000 of the 29,000-person
workforce and boasted
to the New York Times that the yard was "now as
efficient as any shipyard in the world." As a board member of
Pfizer several years later, Mead would help secure a $83 million
golden parachute for the pharmaceutical giant's outgoing CEO.

Mead's job was to help ease the Pentagon's transition to a
corporate culture. In the board's view, one way to accomplish that
was to start creating boardroom titles for military leaders; it
recommended that Congress create a chief management officer, or CMO,
to double-check admirals' and generals' business decisions. Congress
approved, although the job remains open, with only a deputy CMO
currently serving.

The Defense Business Board also champions corporate tactics on
personnel issues. It calls for more and better-paid senior
executives, while depriving middle- and lower-level Defense
Department employees of basic job security. "We believe the DoD
should have a leadership corps composed of senior executives,
managers, professionals, and political appointees drawn from the
best of America's diverse population," the board argued in 2002
in a "Human
Capital Transformation" report. They proposed boosting the
pay for upper-management positions in the department from $130,000
to $225,000. "The gap between what they can earn in service to
their country and employment in the private sector is too great a
sacrifice for them and their families," the board said.
"No high-performing private organization aspiring to upgrade
its management talent would permit such a situation to exist;
neither should DoD."

The board further argued that individual Pentagon bosses should
have the right to fire their subordinates without involving the
workers' union, the American Federation of Government Employees:
"Under the existing system of employment, individuals have
rights not to be terminated without due process safeguards. But, in
an organization charged with protecting the nation's interests and
safety, no individual has the right to be maintained in his or her
position."

In 2004, Rumsfeld got Congress to approve the National Security
Personnel System (NSPS), a new HR policy that offered workers
performance bonuses while giving supervisors more hiring and firing
authority. The change "severely crimped the power of the unions
to handle grievances and bargain collectively," says Tiefer,
the University of Baltimore law professor.

A 2008
investigation by Federal Times found that the first
round of bonus pay under the new policy had been riddled with
iniquities. And a May 2009
investigation by the Pentagon itself found that employees
previously making below $60,000 ended up making less under the
policy—while workers with salaries above $80,000 ended up making
more. In summer 2009, Congress killed funding for the National
Security Personnel System, and the Obama administration considered
ending it outright. But that August, after the pay system had lost
virtually all of its defenders, the Defense Business Board issued a
report saying it should be saved: "[T]he performance management
system that has been created is achieving alignment of employee
goals with organizational goals."

Union leaders called the board's opinion bunk. "A steady
stream of DOD managers and supervisors have told us that NSPS is
unfair, dishonest and effective," says John Gage, president of
the American Federation of Government Employees. "We know that
those under the NSPS system suffer from low moral and lower
productivity."

The Defense Business Board also believed that one path to
transforming military culture was to recruit more business-school
graduates; they could "bring new ideas, energy and private
sector management techniques to the Department of Defense,"
according to a board report. The board discussed the possibility of
changing federal pay rules to hire MBAs at a senior pay grade, even
with no military or workplace experience. One board member, David
Walker, pointed out an obvious complication of hiring so many
business school alums to run the military bureaucracy: "Most
MBA candidates are not motivated by public service. This makes
long-term retention very difficult."

Nevertheless, the board studied how companies like Bear Stearns,
Goldman, General Electric, and McKinsey recruited MBAs, then
recommended that the Pentagon start offering business school grads
senior positions starting at $70,820 a year (which normally required
two years of relevant experience). Rumsfeld loved the idea, but
according to notes from a 2006 Defense Business Board meeting, an
unnamed congressional opponent kept the MBA recruitment plan from
being adopted.

If you wanted to search for ways to make the Pentagon's ponderous
bureaucracy more efficient—an ambition nobody would disagree
with—"why wouldn't you have a balanced task force?"
Tiefer asks. A pro-business perspective could of course be a
valuable component of such a task force, if it were balanced with
alternative viewpoints. "If you want to make reforms, you have
to offer some of the sweet along with the bitter," he says. But
when it comes to the Pentagon's key advisory panel, "that's not
what Rumsfeld set up, and it's what Obama didn't change."

The Defense Business Board operates under a renewable two-year
charter; it was last renewed in early 2010. As the deficit battle
consumes Washington, it appears to be capitalizing on an opportunity
to exert more influence. "There was a left side and a right
side to the defense establishment when Obama came in," Tiefer
says. "The DBB represents the continuity of the right
side."

If the congressional super-committee fails to come up with a
deficit plan, it will trigger $600 billion in non-optional cuts to
the military budget. Some in Congress have already vowed to never
let that happen. But either way, Pentagon funds will be on the
chopping block, and the designs of the Defense Business Board may be
seen as more useful than ever. Even Christie, the conservative
defense analyst, is wary of that. "We look askance at all that
[corporate influence], particularly with respect to the uniformed
military," he says. "This business, the MBA thing, it's
for managers, not for war fighters."

Should Hillary Clinton be indicted by Donald Trump's new AG?

Blogster-at-Large

Bud Meyers writes about the economy, politics, Social Security, corporate outsourcing, labor statistics, the REAL unemployment rate, taxes and tax evasion, government and corporate corruption, and the plight of the long-term unemployed.